Borrowing Powers , Majority Powers and Minority Rights

Presented ByGroup I2Rahul AgarwalSumit SaurabhSailesh NallapothuR SaranathanEmalda Philip

Borrowing Powers Every trading company has an implied power

to borrow A non trading company requires an express

power to borrow This express power has to be included in the

object clause of the Memorandum of association

Public companies can’t exercise borrowing powers till they get certificate to start business

Private companies can exercise borrowing powers immediately after their incorporation

Types of Borrowing Borrowing by a company may be: Ultra vires the company Intra vires the company but Ultra vires

the directors Ultra vires means beyond the power

and Intra vires means within the power

Ultra Vires Borrowing Borrowing beyond the powers of the

company as set by the Memorandum of Association

Such Borrowings are null and void and do not create a debt on the company

Cannot be ratified by a resolution passed by the company in a general meeting

However, the lender has certain remedies

Legal Rights of Lenders In the case of Ultra vires borrowing,

the following are the legal rights of lenders:

Injunction(Neath Building Society v. Luce)

Subrogation Identification and Tracing Suit against the Directors( Firbank v.

Humphreys & Others)

Intra Vires the company but ultra vires the directors

Borrowing within the power of the company but beyond the power of the director

Can be ratified by the company by passing a resolution and made binding on the company

The doctrine of indoor management shall apply if the lender has advanced money in good faith( if the company refuses to ratify the director’s act)

Debentures A debenture is like a certificate of loan or a loan bond

evidencing the fact that the company is liable to pay a specified amount with interest.

Although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital.

Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk free because governments, at worst, can print off more money or raise taxes to pay these types of debts. 

Provisions regulating Debentures

The power to issue debentures can be exercised on behalf of the company at a meeting of the Board of Directors {Section 292(1)(b) of the Companies Act}.

A public company may, however, require the approval of shareholders to borrow money in excess of the aggregate of its paid up capital and free reserves.{Section 293 (1) (d)}.

Debentures have been defined under Section 2 (12) of the Act to include debenture stocks, bonds and any other securities of the company whether constituting a charge on the company's assets or not.

Contd.. Section 117 to Sections 123 of the Companies

Act, 1956 regulate the provisions relating to debentures, appointment of debenture trustees, their duties, creation of Debenture Redemption Reserve Account, liability of trustees etc.

The debentures issued under the Act shall not carry any voting rights. In the case of public issue of debentures, there would be a large number of debenture holders on the register of the company. As such it shall not be feasible to create charge in favor of each of the debenture holder.

Contd.. As per Section 125 (4) of the

Companies Act, registration of a charge for purpose of issue of debentures is mandatory. Section 128 stipulates that where a company issues series of debentures which is secured by charge, benefit of which will be available to all debenture holders pari passu (without partiality).

The attributes of a debenture are:

a. A movable property.b. Issued by the company in the form of a certificate of indebtedness.c. It generally specifies the date of redemption, repayment of principal and interest on specified dates.d. May or may not create a charge on the assets of the company

DefaultIn the event of failure on the part of the company to redeem the debentures on the date of maturity, the Company Law Tribunal may, on the application of any debenture holder, direct redemption of debentures forthwith by payment of principal and interest due thereon.

If a default is made in complying with the orders of the Tribunal, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine of not less than Rs.500/- for every day during which the default continues. (Section 117C) Further this offence is not compoundable under section 621A of the Act.

Majority Powers &

Minority Rights

Foss v. Harbottle Two shareholders brought an action against

the company’s director and promoters alleging, that they had sold land to the company at an exorbitant price.

They brought this action on behalf of themselves and all other shareholders except the defendants

Ruling Foss v. Harbottle: It was held that the conduct complained of was a wrong done to the company and that only the company could sue.[1]

Principle of Majority Rule Democratic Principle Management of affairs of companies is

based on the majority rule Members pass resolutions on various

subjects either by simple or special majority

Once a resolution is passed by the majority, it is binding on all members of the company

Representative and Derivative Action

•Representative Action – On behalf of himself and others to protect their legitimate corporate rights.

•Derivative Action – When relief is sought against third party for the company’s benefit the action may be described as derivative.

Edwards and Halliwell Under the constitution of the defendant trade

union, contributions by members could only be altered by a two third majority in a ballot of the membership.

A general meeting of delegates passed a resolution increasing the contributions of members, without taking a ballot.

Ruling for Edwards and Halliwell :The two plaintiffs, members of the union, successfully sued the union and members of its executive committee for a declaration that the resolution was invalid.[1]

Exceptions to the rule of majority- Minority Rights

Ultra vires and illegal acts Breach of fiduciary duties Fraud or oppression against minority Qualified Majority Inadequate notice of a resolution

passed at a meeting of members Personal rights of a member are

infringed

References[1] Company law by Andrew Hicks &

S.H.Goo[2] Company Law and Practice by A.K

Majumdar and G.K Kapoor http://www.legalserviceindia.com/articl

es/debentures.htm.

http://www.investopedia.com http://www.vakilno1.com/judgements/c

ompaniesact/2000-036cla0193clb.htm

Q&A

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